What Are The Differences Between The Forms?
Schedule K-2 summarizes the pass-through entities’ total international distributive share of items (international tax-related income, expenses and credits). Meanwhile, Schedule K-3 is provided to each partner or shareholder with their share of international income, deductions, credits, etc.
Will The IRS Penalize Entities For Incomplete Forms?
There will be significant penalties imposed related to the new Schedules K-2 and K-3 for failure to file timely or filing incomplete returns, such as information returns, payee statements and information required under Section 6038. These penalties include Failure to File or Show Information on Partnership Return results in a penalty of $195 per month, multiplied by the number of partners during any part of the tax year (not to exceed 12 months). A complete return now includes a Schedule K-2 and K-3. Failure to File Correct Information Returns results in a minimum penalty of $50 per return [for the first-tier penalty, with a maximum penalty of $588,500 (for 2022)]. A Schedule K-3 is treated as a separate information return.
Recognizing the increased complexity in preparing these new forms, the IRS released Notice 2021-39, which provides penalty relief for incomplete or incorrect reporting for taxpayers who can establish that they made a good-faith effort to comply with the new reporting requirements.
Complying with the new schedules can create an additional level of complexity for pass-through entities. It requires solid documentation and experience with international tax standards. That is why companies with international activities should consider how they might ease their burden through the retention of services provided by seasoned professionals experienced in the intricacies of foreign tax structures and their impact on American corporations, and who are keenly aware of any changes to the U.S. tax code and can help guide organizations of all sizes with their filings.
Yuki Miyajima is a tax manager with BPM LLP.